Don't let it get away!

Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.

Honeywell (NYSE: HON) is a good example of a conglomerate with a heavy industrial focus. With units including aerospace, automation and control systems, performance materials, and transportation systems, Honeywell has its fingers in several different niches throughout the industrial sector. But with an economic slowdown possibly coming, can the company position itself to weather the coming storm -- if in fact it comes? Below, we'll revisit how Honeywell does on our 10-point scale.

The right stocks for retireesWith decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.

Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.

Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.

Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.

Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at Honeywell.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$46.5 billion

Pass

Consistency

Revenue growth > 0% in at least four of five past years

4 years

Pass

Free cash flow growth > 0% in at least four of past five years

4 years

Pass

Stock stability

Beta < 0.9

1.35

Fail

Worst loss in past five years no greater than 20%

(45.3%)

Fail

Valuation

Normalized P/E < 18

25.88

Fail

Dividends

Current yield > 2%

2.8%

Pass

5-year dividend growth > 10%

8.8%

Fail

Streak of dividend increases >= 10 years

2 years

Fail

Payout ratio < 75%

49.7%

Pass

Total score

5 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Honeywell last year, the company has kept its five-point score. The stock has performed reasonably well, rising about 10% over the past year.

Honeywell has a diverse set of businesses under its corporate umbrella, but the aerospace sector has really driven results. With Boeing (NYSE: BA) and Airbus both seeing strong levels of aircraft orders and deliveries, Honeywell's role in providing systems for those aircraft has been quite lucrative. With Boeing expecting huge needs for replacement aircraft over the next two decades, the boom could last for quite a long time.

But that's far from the only prospect the company has. For instance, earlier this year, CEO David Cote identified Honeywell's role as a supplier to the auto market as a potential growth engine, with the need for Ford (NYSE: F) , General Motors (NYSE: GM) , and other carmakers to implement fuel-efficiency measures like its innovative turbochargers.

Honeywell has been finding plenty to do. Last month, it announced a deal with Textron (NYSE: TXT) to provide various systems for Textron's Cessna aircraft. It also signed a contract with the Air Force for energy efficiency work.

For retirees and other conservative investors, Honeywell comes with a somewhat high price tag and some volatility. But if you believe that recent growth in aerospace will last, then it might be worth paying up somewhat for a company with exposure to the industry. Honeywell's worth a second look for retirement investors willing to take on some risk.

Keep searchingFinding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills, and teach you how to separate the right stocks from the risky ones.

Honeywell's opportunity to serve the auto industry could let it latch onto Ford's recent success. Ford has been making good vehicles, is consistently profitable, recently reinstated its dividend, and has done a remarkable job paying down its debt. But Ford's stock seems stuck in neutral. Does this create an incredible buying opportunity, or are there hidden risks with the stock that investors need to know about? To answer that, one of our top equity analysts has compiled a premium research report with in-depth analysis on whether Ford is a buy right now, and why. Simply click here to get instant access to this premium report.

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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.
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